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WHY CHEAT ON TAX WHEN YOU CAN GET THE MONEY BACK LEGITIMATELY

It was such an exciting experience to finally speak on Realtor Quest’s stage on Thursday. 

I wouldn’t say that I was sharing a stage with Gary Vaynerchuk, but hey, my picture is on the same page as his on the promotional material!

Of course, armed with my speaker badge, I was hoping to get a picture with him. I waited and requested, I almost got it, but he decided not to take any pictures with anyone.  Oh well, there’s always next time. 😉

A gentleman came by to my booth on the first day asking me an interesting question, ‘how long do my clients need to leave these new build homes vacant before they can rent them out and CRA would not go after them?’

Standing room only at Realtor Quest presentation. I manage to get my Raptors jersey to support our Raptors team.

Well, the fact that he has to ask me this question already meant that his clients do not qualify to claim the New Housing Rebate. The key is that the taxpayers must have the intention to use the new homes as their primary residence. 

If they don’t have their intention, they don’t qualify. 

This gentleman was upset, insisting that I didn’t answer his question.  If his clients intend to rent it out, a simple solution is to pay for the HST rebate upfront.  With a one year lease, his clients are eligible to claim the New Residential Rental Property Rebate. 

Yes.  There’s an extra form to fill out, there’s an extra filing requirement.  But it takes 3 months from the day the application is submitted to when the taxpayer will get the rebate back. 

And you can sleep at night, no CRA issues.

Why take the risk when you don’t need to?

Guess what, CRA is out trying to catch this type of non-compliance.  According to this Toronto Star article, they have already got $1 billion from tax cheats in the real estate sector.

I would do it right and wait for the money to come back. 

Let’s go Raptors!  

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant

HOW TO WRITE OFF 100% OF YOUR CAR AND SAVE $22,826 OF TAX IMMEDIATELY

A close friend of Erwin and I, Andy Tran of Suites Additions, stopped by last night to watch the game with us. 

He told me that he’s going to buy a zero-emission car so he could write off the entire vehicle expense and do not need to pay tax for the year. 

That sounds too good to be true!

When I was doing research to write the blog post for this week, this exact same topic popped up and I thought you might be interested.

If you drive a car to earn business income or property income, you’re eligible to deduct the business use of the vehicle expense.

Typically speaking, when you purchase any vehicle, you can claim the annual wear and tear of the purchase price of the car (up to a maximum of $30K plus HST). 

The annual wear and tear deduction are called capital cost allowance in tax terms. 

The annual rate of deduction is usually 30% on passenger vehicles, the exception applies to the first year of deduction.

You may spend $22K on a used vehicle, CRA would take the $22K as the starting point of the CCA calculation.

You may spend $60,000 on a new Lexus, CRA would only count $30K plus HST as the starting point of the CCA calculation.

Using an example to illustrate, you purchased a $60K new Lexus in 2019 and you only drove 80% of the time for business purpose:

1st year deduction = $30,000 x 1.13 x 30% x ½ (first year rule) x 80% = $4,068

2nd year deduction – you start with the amount that has not been depreciated first and apply the 30% rate decided by CRA = ($33,900 – $30,000 x 1.13 x 30% x ½) x 30% x 80% = $6,916

Year 3, 4, 5, 6…and so on…are all the same… amount of deduction is gradually going down every year.

Now… when you buy a zero-emission vehicle after March 18, 2019, you will get a bigger deduction.  Here’s the difference. 

Maximum capital cost is increased from $30K + HST to $55K plus HST. 

And…the capital cost allowance that you can claim annually is…wait for it… 100% for vehicles acquired after March 18, 2019, and before 2024.

What?! 100%?!

Using the same $60K new Lexus mentioned above, but assuming you bought it after March 18, 2019, and this is an emission-free vehicle, and again, you use the vehicle 80% of the time to earn business income.

1st year deduction = $55,000 x 1.13 x 100% x 80% = $49,720

That’s it.  No year 2, no year 3, no year 4 deduction.  Done and over with!

This can be translated to an immediate tax benefit in year 1 of $22,826! (with 50% tax rate)

Of course, there’s some other impact when you eventually sell the car, that’s a topic of another day!

Now, when you are off to shop for your next car this summer, maybe there’s just a bigger incentive for you to pick a zero-emission car over a regular car!

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Wealth Hacker & Your Real Estate Accountant

HOW TO TURN CASH BACK INCENTIVE INTO TAX-FREE MONEY

Did you all have a great long weekend?

Canada Day long weekend is always special in our family.

My wedding anniversary is on this weekend, while my son’s birthday is also close enough that we all get to celebrate everything all at the same time.

As a thoughtful wife, I knew that my husband would not have remembered our anniversary.  I decided to send him a calendar invite earlier during the week so he would have been fully prepared. 😉

Fun-filled Canada Day long weekend

Haha, these are the things you would do when you’ve been in the relationship for a long time.

We ended up visiting a local restaurant less than 5 min away from our home.  We didn’t make a plan in advance (the calendar reminder trick didn’t quite work with Erwin, LOL!).  The only space available was the bar table and the high table alongside the kitchen.

We chose to sit at the high table facing the kitchen, against our hostess’ advice.

It’s a lot of fun just watching how these 4 chefs, systematically and methodically, cook.  A restaurant kitchen isn’t really a relaxing environment.  It’s more like a manufacturing plant.

We had 1 special treat from the chef, 4 appetizers, 1 entrée and end it with the perfect slice of cheesecake.  If you wonder how the two of us could finish so much food, Erwin is *always* the reason how we can finish so much food! 😉

We’re so grateful that this fantastic restaurant is located within 5 min from our house.  We could have biked there! 

That was the beginning of our celebration.

We hosted two parties back to back to celebrate Bruce’s birthday!  Lucky boy!  As always, we had a blast! 

How did you celebrate your Canada Day long weekend?

As I’m doing my usual court case reading in preparation for today’s blog post, CRA recently provided its view on cash back received on a home purchase.

When we talk about the cash back incentive, it is the payment issued by the real estate brokerage to the home buyers/sellers.

I’ve done multiple presentations on this exact topic to many realtor groups before and I was eager to check out what CRA’s *official* opinion is.

From the brokerage and the real estate agent’s perspective, when you represent a client to buy or sell a property, sometimes, you may offer a cash back incentive to your client as a thank you gesture.

Income Tax Act allows business owners to deduct reasonable expenses that they incur to generate the business income, subject to a bunch of exceptions.

Cashback incentive meets this criteria.  In most cases, these cash back incentive would not have been given if the real estate transaction does not occur. 

Brokerage makes commission income and pays cash back incentive. In my opinion, 100% deductible. CRA agrees too!

Now, what about the buyer/seller receiving the cash incentive?  What’s the tax impact on them?

Well, if the transaction is related to a primary residence sale/purchase, chances are, the cash incentive received is not a taxable income.

If the transaction is related to the purchase/sale of capital property (long-term rental is a good example), the cash incentive would likely be used to lower the cost of your purchase or added to the sales proceeds of your property.  In both cases, your capital gain is higher. 

You’re paying some tax as a result.

CRA concurs with this as well!

If the transaction is related to the property that you intend to flip, this cash rebate would have to be reported as business income.  And of course, this means you will have to pay tax on this income.

Don’t get me wrong.  Just because you’re paying tax on this cash back incentive, it’s always a good thing to pay tax. Paying tax simply means you’re making money!

And if your intention is a flip, all you need is to make sure you have proper tax planning in place so you can take advantage of the low tax rate of 12.5%. 

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant

4 reasons I switched from Variable interest rate to a Fixed rate mortgage

If you don’t know already, the interest rate for a 4-year term mortgage was dropped to 2.95% for rental properties and 2.75% for a primary residence.

I saw a few of these Facebook posts and I immediately reached out to my bank advisor.

We had always opted for variable interest rate. Variable interest rate gives us the flexibility to refinance the property with only 3 months of interest as a penalty.

Fixed rate mortgage
Replacing alarm battery at our rental property

Bonus is that variable rate historically has been performing better than a fixed rate.

Fixed interest rate, on the other hand, is a huge commitment. Typically, if you break a fixed interest rate mortgage before the term for whatever reason, the penalty is the rate differential between the posted fixed rate at the bank and what you’re paying. Obviously, this is just a guide. To have your individual circumstance looked at properly you may wish to speak to a London mortgage broker.

Anyway, what does that mean? It usually means 10s of thousands of penalty triggered.

In 2011, I bought a Toronto townhouse. At the time, it was the largest mortgage I’d signed up for.

The bank offered prime minus 0.8% (those good old days) variable interest rate and 3.29% fixed mortgage rate.

I immediately opted for variable interest rate. Low payment, no brainer.

I asked my circle of friends, who are mostly accountants. They would have opted for a fixed interest rate.

Interest rate didn’t rise for 5 years (and if I remember correctly, the prime rate dropped even further so I was paying less than 2.2% interest rate on my mortgage)!

From then on, I’ve always opted for a variable interest rate. I might set up a higher monthly payment amount (as if I were paying the fixed mortgage amount) just so that I am comfortable with the payment. But I’m a firm believer of the variable rate.

Everything changed last Friday.

We switched from variable rate to fixed rate mortgage.

These are the reasons.

1. We’re not planning to sell any of these properties in the next 4 to 5 years

One drawback to signing up for the fixed rate mortgage is that the penalty can be substantial if we decide to break the mortgage before the end of the term.

Our investment strategy has always been long-term buy and hold.

We’re not intending to sell these properties for a very long time.

The penalty concern is not there.

2. Refinancing is not an option for us

Another reason why we would break the mortgage is if we need the equity to purchase another property.

One way to tap into the equity built up is to refinance the property.

With our growing portfolio, and also our low personal income (thanks to a smart accountant ? ?), it’s impossible to refinance our current portfolio anymore.

Since refinancing is not even an option for us, we feel comfortable committing to a fixed rate mortgage.

3. Our variable rate is high

I have been a firm believer of variable rate and I still am.

At the time when we got these variable mortgages, we were signing up for prime minus 0.1% interest rate.

Fixed mortgage rate at the time was even higher.

It turns out we are paying 3.8% and 3.9% on most of our variable mortgage.

Compared to a 2.95% fixed mortgage, there’s a difference of $100 to $160 cash flow difference per mortgage.

We consulted our mortgage broker and banker and they both agreed that 2.95% is a great fixed rate. The low fixed rate environment is a result of banks’ competition for the mortgage generated from the spring market in real estate.

4. It takes a while before the prime rate would go down

You may think that the prime rate is going to come down soon. I believe it’s going to happen, sooner or later.

I just don’t know how long it will take for the prime rate to come down that it would be at a 2.95% fixed mortgage rate. 

You see, typically the government cuts prime rate by 1 basis point or a quarter basis point.

The current prime rate is 3.95% at Scotiabank.

Based on my old commitment, variable minus 0.15%, my mortgage rate was at 3.8%.

Prime rate must be reduced by 85 basis point before it has the same impact of a fixed rate 2.95% mortgage.

This usually means 1 year to 1.5 years of waiting before it would make any difference to my mortgage.

It’s way too long to wait.

I want to keep the extra $150 cash flow in my pocket than waiting for the rate cut.

These are the reasons why I switched to a fixed rate mortgage.

Even if the banks offer better variable rate discounts, say, prime minus 0.8% now, I cannot simply switch to the new rate, unfortunately. The only option is to switch to fixed. Those looking to find the best remortgage rates and deals, when it’s time to do so, may want to consider using this online remortgage calculator to help them – it can help you to find out the potential savings that you can make when remortgaging your home. Yet another thing to consider when it comes to mortgage matters.

Admittedly, there’s a risk. There’s a risk that the fixed rate mortgage will go down even further. Instead of 2.95% for rental properties, they may go down to 2.85% or even 2.65%. Who knows? That’s the risk I am taking!

In 2 days, we have increased our portfolio cash flow by $800. Not too bad, eh?

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant

TAX MAN DOESN’T WANT YOU TO READ THIS COURT CASE

Recently, I saw a headline, “Condo flippers beware: The taxman is watching you, and has new tools at his disposal to ‘take action’” on Financial Post.

It’s an interesting case as the court sided with the taxpayer’s position. 

Before I go into the nitty-gritty of the case, let’s revisit the basic tax concept.

When you sell an investment property that is considered a capital property (generally speaking, long-term buy and hold are considered capital property), the profit you make from the transaction is considered capital gain. 

Enjoying bubble tea with kiddies in Markham  

Capital gain in Canada is 50% taxable. 

However, if you sell a property for a quick profit, the money you make is considered income.  Income is 100% taxable.

You pay double the amount of tax.

So, how do you determine a transaction is considered capital gain or business income? 

There’re 4 factors deciding whether a particular transaction is capital gain or business income.

  1. What’s the taxpayer’s intention with respect to the real estate at the time of purchase and the feasibility of that intention
  2. Does the taxpayer work in the real estate business?  The more closely the taxpayer’s business/career is related to real estate, the more likely the transaction is considered income, rather than capital gain
  3. How did the taxpayer use the property?
  4. Does the taxpayer have a mortgage on it?  What’s the term of financing?  Short-term vs. long-term financing is also a factor to determine the profit from the transaction is considered income or capital gain.

In this article, the author referred to a recent court case, Bygrave v. The Queen, 2019 TCC 138.  The taxpayer, who is a Toronto Transit Commission transit operator, had lived in a townhouse with his brother since 1999.

His brother got married, continued to live at the same house with his wife and kid.  The brothers had been discussing going separate ways around 2005 and 2006. 

From that conversation, the taxpayer made the decision to put an offer to purchase a pre-construction 2 bedroom apartment. 

The plan was to sell the townhouse and move to a home that was smaller and closer to his workplace.

Their parents bought their residence in Jamaica and planned to retire there around the same time.

Their dad passed away in Jamaica in 2009 and mom decided to move back to Canada to live with the family.

Since mom moved back, the taxpayer thought that living in a 2 bedroom condo would be too small for him and his mom. 

So, he took occupancy of the pre-construction condo in 2009 and sold it immediately. 

He reported the sale as a capital gain.

For those who’ve followed my blog for a while, I discussed how CRA has been very aggressive in auditing real estate transactions in recent years.

If you sell a brand new property without living in it, or rent it out and report the sale as a capital gain, CRA always treats it as a flip. 

It’s no difference in this case.

The taxpayer disagreed with CRA’s assessment and he appealed.

The court analyzed the transaction based on the 4 factors mentioned above. 

  1. Taxpayer’s intention was to use the property as his primary residence.  Circumstances changed and his mom was to going to live with him.  A 2-bedroom apartment was no longer big enough and he decided to stay instead.  His intention was to always move into the property. 

The taxpayer was also able to provide proof (mainly documents showing addresses that are consistent with his claim). 

The judge concluded that his intention was on the capital account.

  • The taxpayer is a TTC transit operator.  His occupation has nothing to do with real estate.  Judge also concluded that this factor favours a finding on account of capital.

One interesting thing to note though, the court case even went as far as mentioning the taxpayer’s brother’s occupation and their late father’s occupation for analysis purposes. 

The court goes far beyond the taxpayer’s own occupation to determine whether the taxpayer has any connection to the real estate industry. 

  • The taxpayer didn’t use the property as a rental property (did not rent it out).  In the court’s eyes, this factor favours a finding on account of income.
  • Taxpayer refinanced the townhouse to buy out his brother’s share of ownership in the townhouse.  He also admitted that he could not carry the mortgages for both the townhouse and the condo at the same time.  Limited information was provided for the court to analyze this factor.  The judge found that this factor to be neutral.

Based on the analysis listed, especially with respect to the intention of the taxpayer, the tax court judge sided with the taxpayer. 

This is a small win for us, being the taxpayers, but you can’t simply rely on your own “intention”.

The intention is based on case facts.  Every case is different.  The key is to keep the documentation that can corroborate and support your intention. 

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant

‘Buy Renovate Refinance Rent’ (BRRR) – how to make 1.5M in 2 years

Recently Erwin and I got to take a tour of our friend Monica’s commercial plaza nearby at Bracebridge. If you are familiar with the real estate investment strategy BRRR (Buy Renovate Refinance Rent), that is what she and her husband are doing in this property.

She’s had this property for over 2 years now.  The property was a power of sale and she got it at a really good price.

A great price also came with a lot of work – a collapsed roof, mold issues, asbestos, vacant commercial units, etc.

Needless to say, no bank is interested in financing this property, so they chose the beforementioned BRRR path to make it work.

Except that the numbers aren’t quite what we handle on a daily basis.

Renovation is over $1million and it is still going. 

So, what are the tax considerations they need to consider when they use ‘Buy Renovate Refinance Rent’ in a commercial property?

HST impact on substantial renovations

If you are renovating a residential property (even if the residential property is a part of commercial property), you may have an HST impact on the renovation.

If you do the substantial renovation on a residential property (or on the residential unit of the commercial property), you are required to do a self-assessment and pay HST to CRA.

If you simply renovate (not substantial renovation) a residential unit in a commercial unit, make sure you separate the HST related to the residential unit renovation.  You cannot claim the HST you pay on the residential renovation as a credit on your HST return.

HST exposure, if converting the commercial unit to residential units

If you are converting a vacant commercial unit to residential units, you are required to do a self-assessment on the fair market value of these residential units.

You have to pay CRA the HST on the fair market value of these residential units.  

Make sure you account for these extra costs before doing the conversion.

HST audit

When you are doing a substantial renovation on the property, you can claim the HST you paid to purchase materials and your contractors on your HST returns as Input Tax Credits.

If the HST you paid is greater than the HST you collect, you are claiming a refund.

Sometimes, this amount can help with cash flow.

But more often than not, this also means that you likely will get an audit. 

If you’re asking for a refund on your HST return, be prepared for an audit.

Soft costs incurred during the renovation period is not an immediate expense

Major renovation costs are usually not a one-time write-off expense. 

Soft costs, including carrying costs, interest expense incurred prior to the property being rented.  If you have only a portion of the units ready to rent, then only that portion of the expenses can be deductible.

Cash flow consideration

My friends aren’t extremely wealthy. They made good money with a lot of hard work. 

But the amount of money involved in bringing this property from distress to the current stage can break many people’s banks. That was how the previous owner got this property foreclosed as well.

Although this is not a tax consideration, it is worthwhile mentioning that you do need to have the financing ready for the renovation, including the carrying costs of the property.

Doing a month by month budget would help you prepare for the worst case, and plan to get more credit.

Here’s a small video I did at her property. 

For more visit my YouTube channel – Real Estate Tax Tips

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Real Estate Accountant, Wealth Hacker

5 REASONS WHY MY AIRBNB DOESN’T GENERATE AS MUCH INCOME AS OTHERS

Airbnb is a great way to earn extra money.  It has become some of my clients’ side hustle.  A few of my clients become full-time Airbnb operators.

We’ve heard how great Airbnb is and I’ve seen some crazy numbers.

One of our properties was vacant at the time.  Erwin wanted to give it a try. 

The property that we operate Airbnb from is a single-detached home in Hamilton mountain.

We spent roughly $15K to furnish the property, with used commercial-grade furniture and some help from a home stager.

We’ve been operating it as Airbnb for 2 months now. 

I got to enjoy a couple of days at Darien Lake without worrying about my Airbnb rental. 😉

Our property manager, who’s also an Airbnb operator and owner, has done an amazing job keeping this place full. Those renting out their properties would do well to find themselves an experienced property management company if they hope to keep the properties occupied whilst also avoiding dealing with tenants and the legal side of things.

Since we went live about 2 months ago, we only had 3 nights of vacancy. 

Pretty good, isn’t it?

We’re also fully booked in the month of August.  ?  

We couldn’t have asked to work with a better property manager!

Cash should start rolling in, no?

Well, here’s a high-level comparison from the two months of Airbnb operation.

1. Eliminating the HST impact from cash flow

In Canada, if you rent out a property consecutively under 30 days, you’re required to charge HST on the rental.

Same concept as operating a hotel.

Airbnb platform does not allow you to charge HST.  Guess what, your rent is inclusive of HST. 

When you calculate your “cash flow”, make sure you need to set aside money for CRA.  They want their sales tax cut first!

Some Airbnb operators intentionally keep their Airbnb income lower than $30K, to avoid paying HST. 

In our situation, we just don’t qualify for the small supplier rule.  ? 

2. Adjusting for seasonality

As Canadians, we all know Canadian winter can be brutal. 

Who would really want to come to Canada in the heart of winter?

We know that our busiest months would be summer. 

We’re fully prepared that there will be some vacancies expected in the fall and winter.

As great as it is to have a fully rented Airbnb in July and August, a portion of the money will likely be used to offset against the vacancies in the winter.

We have to look at the operation for the entire year before we can be certain of the Airbnb financial performance.

3. Accounting for the property management fees

Most Airbnb property management charges 20% to manage the property. 

Well deserved money.  I don’t want to ever answer the question of why the internet is so slow at 10 pm.

There’s a saying in the small business world, ‘if you don’t have ______ (certain role in your organization), you’re _______ (that role).’

If I didn’t have a great property manager, I would have been the property manager.  We had decided that we didn’t want to be an Airbnb property manager. 

This is non-negotiable and we knew that we had to budget for the PM fees.

Because of this property management fees, immediately our cash flow is 20% less than what some other investors, who operate their Airbnb personally. 

4. Straight rental rent is high in the area vs. Airbnb rent

If we weren’t doing Airbnb, we would have rented out the property as a straight rental.

My opportunity cost of operating Airbnb is the rent I would other earned from straight rental.

This house, as a single-family detached home, in today’s market, can likely be rented for $2,200 plus utilities.

My Airbnb numbers have to beat this $2,200, or else it would not worth the effort.

Specifically, my Airbnb numbers, after deducting HST, property management fees, utilities, lawn care & snow removal, have to beat the income I would otherwise earn from single-family home rental.

Otherwise, I would likely be better off operating the property as a single-family home.

5. Smaller multi-units (such as duplex/triplex) will give you higher cash flow

Our property is a single-family home.  We can’t divide it into two units without spending a fortune. 

We aren’t planning to divide it anyway.

As a result, we are renting three floors of space (including the basement) for one fixed price.

Our rent is marginally better than someone who’s renting out a 2 bedroom unit on Airbnb. 

Some of the people who operate Airbnb have multi-units, rent per square foot is a lot higher compared to ours.

They generate better cash flow, just because the rent on 2 bedroom unit on Airbnb is much proportionally higher than the rent from our 3+1 bedroom house on the Hamilton Mountain.

Although we’re not generating the income that some other investors are getting, we’re still happy with this Airbnb. 

We have a great property manager (thanks Bryan) and I never had to call any trades to fix the property.  ?

We have a good income, comparable to a single-family home rental.

Bonus, we don’t have to deal with the Landlord Tenant Board on this property!

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant

WHY INCORPORATE WHEN YOU CAN INVEST IN RRSP?

You may have already known, I am an accountant. This means that I have to look at numbers all the time.

I have always been equipped with two monitors, one from my laptop and one extra monitor.

Recently I had the opportunity to upgrade my monitor. 

I selected the 32” curved monitor from Samsung, a white, thin, very modern looking monitor.  It was way too big for me and I ended up getting a 27” flat screen one. 

Creating memories with my little one last weekend at African Lion Safari 

I can still recall how excited it was for our family to get a 27” TV in my teenaged years.  A 27” TV was HUGE at the time. 

Today, I am getting a 27” monitor as my work monitor.

Of course, the 27” TV costed a lot more than what I paid for my 27” monitor. 

Things we take it for granted today were once luxury items, or even unimaginable not too long ago.

When technologies are moving at lightning speed, our tax system remains the same.

Complicated.  Cumbersome. 

It’s always interesting to see what people do to save taxes.  Recently, I saw a real estate agent asking for tips on saving taxes.

Some people take a big step to set up a corporation. 

One person asked, “why do I set up a corporation if I can contribute to RRSP?”

The number 1 advice we get from accountants to reduce your taxes is to contribute to your RRSP.

There’s nothing wrong with it. 

In many hardworking Canadians’ cases, it is truly the only thing to lower your taxes.

But for self-employed individuals and small business owners, incorporation provides many advantages over-contribution to RRSP.

1. Reinvestment to your business

Yes.  RRSP can defer taxes.  

You earn the money as a small business owner.  You contribute to your RRSP so you can save the taxes on the contribution.

But once you make a contribution to your RRSP, you no longer have the money available to reinvest to your business. 

100% of the net income has to go into a restricted investment fund. ☹️ Nothing left for reinvestment.

On the flip side, if you incorporate, yes, you will have to pay 12.5% to CRA as income tax, you still have 87.5% left to reinvest in your business.

As small business owners, we all want to expand our businesses.  This requires reinvestment of funds, such as purchasing equipment and system building, that sometimes is not a tax deductible write off. 

This means that you would still have to pay taxes on the cash you’ve spent on the business and you won’t get the tax write off until future years.

If you contribute to RRSP, the money is no longer there.  No investments can be made.

If you have a corporation, you pay 12.5% tax-deductible still have 87.5% left for your business reinvestments.

2. Unrestricted investment options in a corporate structure

RRSP is a great way to defer taxes, bur RRSP is restricted.

There’re multiple articles and publications done by CRA to teach people what they’re allowed to invest in. 

Yes, you have 100% of the funds available to invest, but if you don’t like the public stock market, you would have eliminated the majority of the investment options available. 

I still remember the old days how I would save the money, contribute to my RRSP, and leave the RRSP as cash and do nothing with them. 

I tested out a couple of stocks but I wasn’t really that successful. ☹️ Blackberry (back then it was called RIM) was one of the stocks that I invested.  I bought them over $50 per share and it went down to $11. 

I’ve since cashed out from my RRSP. 

On the flip side, if you have a corporation, yes, my business would have to pay 12.5% to CRA as income tax, but I still have 87.5% left to choose to invest in whatever I want. 

Yes.  I can still buy RIM shares if I want (although I wouldn’t advise doing it anymore), but I can also buy real estate.

There’re private equity deals that are out there and only non-registered account investments are accepted. 

After-tax corporate funds can be used to invest in these deals, but RRSP funds cannot.

3. Income splitting opportunities with your family members

It’s true that the income splitting opportunities are much more restricted from before.

Having that corporation does not allow you to split income like before.

But this does not mean that there aren’t any opportunities to split income with your future self, split income with your spouse when he/she gets older, split income with your family members provided that they work in your business in the previous years. 

There’re still opportunities available, you just need to find them and jump through the hoop.

Arguably, you can contribute to RRSP and achieve a certain extent of income splitting with your lower-income spouse (with years of planning and caution). 

But the corporation provides so much more flexibility over RRSP investments.

Until the Canadian tax system advances like our technologies, the corporation remains one of the biggest tax hacks you will get in the Canadian high tax rate environment. 

Until next time, happy Canadian Real Estate Investing

Cherry Chan, CPA, CA

Your Real Estate Accountant

THE HST RISK HIDING IN CONVERTING COMMERCIAL TO RESIDENTIAL UNITS

Do you feel a bit chilly these days?

It’s the last week of August and we’re already at the low twenties. 

Robin, my older kid, is counting down her days to start her Senior Kindergarten year.  I hope she would still look forward to starting school when she gets older. 

Bruce, my son, on the other hand, is still enjoying moment by moment.  

Last week of summer camp at our good friend and client Mary Clements French school

If you haven’t noticed already, my husband and I are hosting Grant Cardone Nov 9 at Toronto Congress Centre.  The theme of the event is to inspire fellow hardworking Canadians to take control of their finances, earn short-term cash flow and build long-term wealth.

This is a huge undertaking from personal time and money commitment. 

As the worrier in the relationship, I seem to be the one that’s stressed out about this event most of the time.  ?

Of course, it also shows in our weekly team meeting.

One day, our new marketing consultant made a comment this week at our meeting that resonated with me, ‘enjoy the process’. 

I’ve been chewing on this comment for quite a few days, trying to take in every moment, bit by bit, learning from Bruce, my 4-year-old son. 

For those of you who have not bought the tickets yet, our prices are going up after labour day.  Make sure you get your tickets at Wealthhacker.ca. 

Now onto this week’s topic…

A client of mine is preparing to purchase a mixed-use property. 

Mixed-use property usually consists of a few residential units and a few commercial units that are rented out to businesses.

Whenever you buy a commercial property, chances are, the sellers would charge you HST on the purchase of commercial property unless you have a proper HST number provided to the seller’s lawyer at closing.

If you do, you can get exempted from the HST amount.  Instead, you will need to file your HST return telling the government that you purchased a commercial property, but you did not pay HST.  

Now, technically speaking, you are not required to pay the HST if you continue to rent these commercial units out to commercial tenants. 

But my client’s intention is to convert the currently vacant commercial unit to residential, rather than continuing on as commercial rentals.

When you convert a property from commercial to residential, there’s HST exposure on the conversion.

My client would have to pay HST on the conversion when the property is converted.

He can get exempted when he purchased the property with an HST number.  At the conversion, he would have to pay HST on the fair market value of the commercial unit. 

Ultimately, this scenario just goes to show how important it is to seek legal advice when purchasing commercial property.

Navigating commercial property law can be complex and therefore it is totally understandable if you start to feel overwhelmed by all the technical jargon involved.

In short, consulting commercial property solicitors in Yorkshire or commercial property experts wherever you might be based when buying a commercial property is strongly recommended to ensure that you can make the best possible choices.

Unfortunately, there is no way to avoid the HST when a conversion is done.

Until next time, enjoy the final days of summer!

Cherry Chan, CPA, CA

Your Real Estate Accountant

P.S. Don’t forget to visit Wealthhacker.ca to get your tickets before ticket prices go up after labour day!

HOW TO HIRE YOUR CHILDREN AND SPLIT INCOME LEGITIMATELY

It has been an exciting week here at my household.

Both kids are off to school. Yep, both Robin and Bruce are officially in full-day Kindergarten.

We got a letter from his school about Bruce’s class placement. He didn’t get into the class we requested.

You’re probably thinking now… Cherry must be one of those helicopter moms. 😉

I swear, I’m not.

We just wanted him to get into a class with our neighbour’s son, whom he plays with regularly, so it would make his first year of Junior Kindergarten a lot smoother.

This little guy was so overwhelmed first day of school that he could barely smile for the pix  

But he didn’t get in…

It never felt good to be rejected, but I was totally prepared to let this one go. 

After all, how bad could it be since it’s just JK?

We ran into another mom whose son is already one year with Bruce’s assigned teacher.   I asked her how her experience has been. 

Negative. 

Oops… what would you do if you were us?

We called the school but no one answered…and we never called back.  

Labour day came, our kids were out playing with our neighbours’ kids as usual.   Our neighbours are teachers at the school board. 

Their older daughter also had previous experience with Bruce’s assigned teacher. 

Their experience… negative again ☹️☹️ Two strikes! 

No parents want to fail their kids, especially when they’re so young. 

Armed with the guilt from not requesting earlier, I immediately fired off an email to the Vice Principal, not really expecting him to respond on the Labour Day Monday.

To my surprise, he responded a couple of hours later.  Bruce’s switched to our original requested class!  Yay!  Success!

Two life lessons learned:

  1. You fail 100% at the shot you don’t take – you don’t ask, you don’t get it (it was uncomfortable for me to persist, especially after our first request was turned down, but the guilt of failing as a parent eventually won…). Same in real estate investing. You don’t try, you won’t get what you want. Always have your end goal in mind.
  2. School, class placement, real estate investment, long-term wealth building and whatever you set your mind doing, is best if you have someone who has been there, done that, to guide you through the process. Always learn from those who are ahead of you, get the experience, so you could avoid the mistakes that they made.

Now life lessons are over…let’s discuss the possibility of splitting income with your kids, by means of paying them to do some work for you.

Can you pay your children’s salary/fees?

Some of you might have kids who’re old enough to handle some of the business and investment property chores for you (that’s how I call those tasks that you must do but don’t necessarily want to do with respect to your investment properties and business). 

They can definitely help you with the work that you don’t want to handle.

In return, they can receive a reasonable amount of compensation.

Let’s say, you hire your daughter to do some bookkeeping work for you.

You can only pay her the same amount you would otherwise pay an independent bookkeeper to do the same thing for you.

If you would normally pay $300 a month to perform the bookkeeping duty for you, you cannot pay your daughter $800 just to split income with her. 

Because your children are related to you, the risk from CRA’s point of view is that these children may not really perform the duties as described.

On top of reasonable compensation, you also have documented the type of work that’s being done.

This may include but not limited to:

  • Proper employee file, such as employment contract
  • Timesheet
  • Description of work done
  • Invoices, if hired as subcontractors
  • Proof of payments
  • Payments made on a regular basis

Filing obligation from the kids’ point of view

If your kids are over the age of 18, it is always wise to file an income tax return.  You get GST tax credit, sometimes Ontario Trillium Tax Benefit. 

If your kids are under the age of 18 and you don’t know if the income is enough to trigger the tax, it’s also wise to file a tax return. 

But if you are certain that your kid has no tax liability, you can choose not to file a tax return.

I hope that one day, I would be able to pay my kids to do some work in my business for me too!

Until next time, happy Canadian Real Estate Investing.

Cherry Chan, CPA, CA

Your Real Estate Accountant